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South America's Best Stocks

A look at some intriguing stock ideas in the Southern Hemisphere.

That's the prevailing opinion among the more than 100,000 investors participating in Motley Fool CAPS, the Fool's free investor-intelligence community.

These days, many investors want to tap the growth potential of South American stocks. In fact, eight of the top-100 rated stocks in the CAPS universe hail from Argentina, Chile, or Brazil.

A new hopeWhile many global markets have fallen this year, the South American markets have held up relatively well. As of April 30, Brazil's and Chile's markets were up 11.2% and 7.6%, respectively, year-to-date, in dollar terms. Chemical & Mining Co. of Chile (NYSE: SQM) and Vivo Participacoes (NYSE: VIV), in particular, have risen 58% and 31%, respectively, so far this year. But neither SQM's nor Vivo Participacoes' surge came as a surprise to the CAPS community. Both have carried CAPS' top rating of five stars for more than six months, and our players rated SQM the best South American stock back in February.

Where will the next big winner come from? Here are this month's top five South American stocks right now, all of which, like SQM and Vivo, carry CAPS' maximum five-star rating.

Company

Country

Industry

iShares S&P Latin America 40 Index (NYSE: ILF)

South America -- General

ETF

Companhia Paranaense de Energia (NYSE: ELP)

Brazil

Electric utilities

Telmig Celular Participacoes

Brazil

Telecommunications

Companhia de Saneamento Basico

Brazil

Water/sewage utilities

Telecom Argentina

Argentina

Telecommunications

Data from Motley Fool CAPS, as of April 25, 2008.

Please bear in mind that these stocks are not formal recommendations. Instead, they're offered as jumping-off points for further research. Researching five-star CAPS stocks has proved to be an effective tool for investors.

Look before you cross the streetRegional exchange-traded funds like the iShares S&P Latin America 40 Index have grown in popularity in recent years, both as a way to diversify and to make bets on regional growth. But not all regional ETFs do what you think they may. For instance, one might think that with oil prices being high, the SPDR S&P Emerging Middle East & Africa ETF is a good place to be because of the oil-rich countries in the region. But in fact, this fund has more than 75% of its assets invested in Israel and South Africa and only about 6% in energy stocks. Probably not what you had in mind.

So does this Latin American fund live up to its name? Sort of. Here are the regional breakdowns:

Country

% of Assets

Brazil

63.4%

Mexico

27.0%

Chile

6.6%

Luxembourg

2.4%

Argentina

0.2%

Source: Morningstar, reported as of March 31, 2008.

A few things stand out here. For one ... is that Luxembourg? Isn't that in Europe? For whatever reason, the ETF holds shares of Luxembourg-based steel and iron company Tenaris (NYSE: TS). Now, it would be one thing if Tenaris did a majority of its business in South America, but it doesn't -- only about 23% of Tenaris' sales come from there.

Besides that anomaly, Argentina doesn't seem to get enough coverage in the ETF. And that's a shame. Argentina has the 25th largest economy in the world, yet it makes up only 0.2% of this Latin American fund's assets. Sure, it may not be as important as Brazil or Mexico to this region's economy, but it's certainly more important, not to mention more relevant, than Luxembourg.

Nevertheless, CAPS investors think this ETF is the cat's meow. Of the 516 players who have rated the stock, 507 of them think it will outperform the S&P 500 going forward. One of those bulls is Ayn Rand fan club member HoweirdRoark, who wrote last October that it was time to join the Latin American economic renaissance:

Extraordinary growth in Latin America the last 5 years, and this region will continue to grow for years to come. Economy is stabilizing, Political situations are stabilizing; these areas are embracing capitalism and becoming more developed with every passing day. Take advantage now, because the greatest growth potential is no longer in the U.S. -- developing and emerging economies are where it's at.

This is a fund to consider if you're particularly bullish on the Brazilian economy and want exposure to names such as Vale (NYSE: RIO), Petrobras (NYSE: PBR), and Banco Bradesco. It's not, on the other hand, a one-stop shop for broad regional diversification.

You can see what other CAPS investors have to say about the iShares S&P Latin America 40 Index, or any stock for that matter, by joining CAPS today. After you've read their opinions, be sure to voice your own!

Global Gains is The Motley Fool's international investing newsletter. If you're interested in South American companies, take a free 30-day trial to the service to see what we have to offer.

Fool contributor Todd Wenning, ranked 341 out of more than 100,000 CAPS players, speaks broken Spanish. He does not own shares of any company mentioned. Petrobras is an Income Investor pick. The Fool has a disclosure policy.